Managing the Impact of
The closure of the economy following the outbreak of the COVID-19 pandemic has had a particularly severe impact on our business which was considered a non-essential service during lockdown, with stores closing for 5 weeks in South Africa and 12 weeks in the UK.
The Group’s response to mitigate the impact of COVID-19 on its operations was swift and decisive. A COVID-19 task team comprising the Truworths board and key executives was established and identified immediate priorities:
- ensure business sustainability;
- ensure the well-being of employees and customers;
- conserve cash;
- take care of real estate;
- manage inventory levels and merchandise orders to protect gross margin;
- protect the supply chain;
- reduce operational expenditure;
- access government support schemes for employees;
- manage the debtors book; and
- maintain dividend flow to shareholders.
While the lockdown restrictions have had a devastating impact on performance, the Group’s response demonstrated effective business continuity, robust risk management and the ability to operate in a state of disaster. The focus on cash preservation resulted in the Group ending the financial period in a net cash position, despite the lockdown. The impact of the pandemic on the business operations is addressed in relevant reports throughout our Integrated Report.
Following the start of the national lockdown with effect from midnight on 26 March 2020, Truworths was unable to trade from stores or online in South Africa for five weeks and no revenue was earned from the sale of merchandise. After restrictions were relaxed, clothing retail stores were allowed to reopen on 1 May. Truworths promptly resumed trading from all stores on this date, despite only having one day’s notice of the reopening.
The UK went into lockdown from 24 March 2020 until 14 June 2020. During this time the Group’s stores across the UK were closed, although online trading was permitted which was favourable for Office given its strong e-commerce presence. Office followed a phased approach to reopening stores from 15 June 2020 onwards.
The well-being of employees was paramount throughout the crisis. Communication with employees was critical in providing business updates, educational information on COVID-19 and steps being taken to mitigate the financial impact of the pandemic and lockdown on operations. The WhatsApp digital messaging service was used to cascade communications to each level of employees. Strict COVID-19 protocols were implemented across all areas of operation to ensure the safety of employees.
Truworths applied for Unemployment Insurance Fund COVID-19 Temporary Employer/Employee Relief Scheme benefits on behalf of qualifying staff in South Africa. Office applied for funding from the UK Government’s Coronavirus Job Retention Scheme for all qualifying furloughed employees.
An internal fund was established to financially assist staff in critical need. The Truworths directors, divisional directors and other senior management of the company volunteered to sacrifice a portion of their remuneration to support lower-earning staff, while Office’s senior management donated 50% of their salaries for at least two months.
Employees in key roles were required to work from home from the start of the national lockdown. Employees not required to work from home used their remaining special leave and annual leave, before utilising unpaid leave.
After South Africa moved to lockdown level 4, head office operations resumed on 4 May 2020. Employees worked on a rotational shift basis to limit the number of people at head office and to ensure social distancing.
Truworths developed a mobile app to enable employees to check and record health symptoms daily before coming to work, and to declare any exposure to people who had tested positive for COVID-19 or displayed symptoms. Everyone entering the head office has their temperature recorded using sophisticated camera technology with mask detection, while random screenings are performed throughout the day. These and several other measures have been implemented to ensure employee safety in the workplace. Refer to Truworths’ Human Capital Report.
Following the start of the lockdown all store staff and those in supporting field-based roles were furloughed. Head office employees in key roles were required to work from home on reduced hours and salaries while those who were not required to work were also furloughed. Refer to Office’s Human Capital Report.
Managing account payments
Account payments in Truworths declined significantly during lockdown owing to customers not being able pay their accounts in store, which is the preferred means of payment for the majority of customers. Supplementary digital payment channels were opened ahead of lockdown and customers were also able to pay accounts at major food retail chains which traded during lockdown. A core team of collections staff was enabled to work from home to continue servicing the debtors book and driving digital collections. Owing to the adverse financial effect of the lockdown on many South Africans, payment interventions were offered to customers whose accounts were in good standing, including a one-month skip payment option (refer to Managing Account Risk).
Supply chain and inventory management
The pandemic had a significant impact on the international and local supply chain, and processes were implemented to mitigate the risk of the business holding excess inventory due to reduced sales, thereby protecting the gross margin and preserving cash.
Sales forecasts were adjusted to manage stock levels, with the planning and buying teams negotiating with suppliers to either cancel or preferably delay orders. Truworths also provided support and assistance to key local suppliers in the form of advice, early payment terms and the purchase of raw materials for production. In Truworths, gross inventory only increased 3.1% for the financial period, with no winter over-stock position and no impact on the gross margin. Inventory levels in Office were 26.0% lower at period-end, contributing to the Group’s inventory being down 4.6% for the period. Refer to the Truworths Managing the Risk of Fashion and the Office Managing the Risk of Fashion report.
Engaging with landlords
Following extensive negotiation with landlords on the payment of rentals and services during the COVID-19 lockdown, and subsequently when trading restrictions applied, Truworths reached agreement with most landlords and paid approximately 15% of rentals due.
In Office, management engaged with landlords in an attempt to secure lockdown rental concessions and to negotiate more favourable lease terms or exit leases. Rental concessions were agreed and in some instances more favourable lease terms were secured.
Stores were adapted to be COVID-19 secure to ensure the safety of employees and customers after the hard lockdown ended. Store layouts were adjusted to meet social distancing requirements, while the number of customers permitted in stores was limited. To ensure safety, specific guidelines are being followed when garments and footwear are tried on by a customer. In Office, if an item is not purchased, it is cleaned with anti-viral spray and left in quarantine for an hour before being returned to stock. In Truworths, garments that are tried on in-store and not purchased are heat pressed before being returned to stock.
COVID-19 and the related trading restrictions contributed to:
- lower revenue being generated from retail sales and lower account payments;
- higher provisions for doubtful debts in Truworths which increased operating expenses; and
- the impairment of intangible and other assets.
These factors have had a significant impact on the Group’s profitability for the 2020 financial period and this is covered in further detail in the Chief Financial Officer’s Report.